Proposed 2016 budget not reform-oriented, analysts say

The proposed 2016 budget is not reform-oriented, and genuine reforms might be visible only in the government's economic programme, which the European Commission will assess in May, and in the 2017 budget, analysts say.

The Croatian government adopted the draft 2016 budget at its meeting on Thursday, projecting revenues at HRK 114.9 billion, expenditures at HRK 122.4 billion and the deficit at HRK 7.5 billion or 2.2% of GDP.

The budget is based on the estimate that this year GDP will grow by 2%, after gaining 1.6% last year. The growth is expected to be underpinned by domestic demand, and foreign demand should also be positive, Finance Minister Zdravko Maric said.

The European Commission also expects the Croatian GDP to grow by about 2%, but domestic analysts are more cautious.

"Growth could eventually be less than 2% because we face a lot of external risks. I think this is a very optimistic estimate because it is based on an estimated increase in domestic and foreign demand. But increased domestic demand usually also means increased imports, so that net foreign demand this year cannot contribute to economic growth more significantly," said Hrvoje Stojic, chief of research at Hypo Alpe Adria Bank.

Stojic said that the budget and the economic guidelines showed that in fiscal consolidation the government was relying more on the economic cycle and GDP growth than on reducing expenditure.

While presenting the budget, Minister Maric said that the projected deficit of HRK 7.5 billion or 2.2% of GDP would be the lowest since 2008. However, with the addition of six extra-budgetary funds and local government units, the general government deficit climbs to 9.2 billion or 2.7% of GDP.

The total budget expenditure of HRK 122.4 billion is 3.8 billion higher than in 2015.

Stojic said that the government could have shown greater courage and political readiness by making cuts on the expenditure side of the budget because there was room for that. "If the price of freezing the wage and social transfers budget is avoiding the risk of increasing public-sector wages by 6%, then it can be said that the expenditure side of the budget, given the short manoeuvring time, is defined prudently."

He said that the greatest risks to achieving the budget targets lay on the revenue side of the budget, if the expected growth failed. Of the total planned revenue of HRK 114.9 billion, which is 4.7% higher than last year, taxes are expected to bring in HRK 68.9 billion, up 1.2%, while revenue from EU aid was estimated at HRK 9.7 billion, or 96.5% more than in 2015.

"It is understandable that there was no time for bigger reform moves in this budget. This budget is what it is and it is not a test of the fiscal credibility of this government. Its credibility will be shown in the coming months after it adopts its economic programme, which the European Commission will assess in May, and in the budget for 2017," Stojic concluded.

Economic analyst Damir Novotny said that he was not happy with the proposed budget, describing it as a continuation of the bad practice used over the last 15 years. He stressed that the budget should have incorporated some of the European Commission's recommendations.

Novotny said that he had expected a slightly different budget to the recently present budgetary guidelines. "I don't see any specific changes. Some modest savings are visible, but there has been no reversal in the approach to the budgetary polices of the last 15 years or so. The budget is actually based on the approach that the ministries and other budget beneficiaries should make their own budget policies."

"This is roughly what the government thinks will please the European Commission, but I am confident that the Commission will ask for at least structural cuts to budget expenditures. Personally, I certainly expected some changes, because we are in the Excessive Deficit Procedure . We have very clear and precise recommendations from the Commission and they should have been followed, but this budget does not show that," Novotny said.

The European Commission on Wednesday sent early warning signals to six EU member states, including Croatia, regarding their respective obligations under the Stability and Growth Pact, reminding them to take necessary measures so as to maintain their public finances sound and adjust their fiscal policies.

Croatia and the other countries concerned must provide the Commission with their respective national reform and convergence programmes by the end of April. Based on these documents, the Commission will present its proposals for a new set of country-specific recommendations in May.

The Stability and Growth Pact provides that a country's budget gap will not exceed 3% of its GDP and public debt 60% of GDP. The Croatian government estimates that the budget deficit will fall to 2.2% of GDP in 2016, 2% in 2017 and 1.8% in 2018.

Minister Maric said that the government had come to grips with the galloping public debt, adding that debt was expected to stagnate this year and decrease thereafter.

According to the projections, the public debt to GDP ratio at the end of 2015 was 86.9% of GDP, while at the end of this year it is expected to drop to 86.8% of GDP. By 2018, public debt is forecast to fall to 84.7% of GDP.

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